Japan's Bold Fiscal Move Sparks Global Economic Concerns
In a decisive electoral victory, Japanese Prime Minister Sanae Takaichi's coalition secured 354 seats in the 465-seat lower house on February 8, 2026, granting her a powerful mandate to pursue an agenda of tax cuts and increased public spending. This move, however, comes at a time when Japan's public debt stands at a staggering 230% of GDP, more than double that of the United States, raising alarms about potential financial instability.
The Ripple Effect on Global Markets
Experts warn that Japan's fiscal policies could precipitate a crisis in its government-bond and foreign-exchange markets, with repercussions echoing across the world financial system. Desmond Lachman, a senior fellow at the American Enterprise Institute, highlights that such a crisis would be particularly ill-timed for the U.S., which is grappling with its own fiscal challenges under President Donald Trump.
The U.S. public debt exceeds $38 trillion, and Trump's One Big Beautiful Bill Act is projected to maintain budget deficits above 6% of GDP for years, pushing the debt-to-GDP ratio to 140% by 2030. This precarious position is compounded by the nation's reliance on foreign investors, who hold $8.5 trillion in Treasury bonds, making it vulnerable to shifts in global confidence.
Japan's Economic Vulnerabilities
Prime Minister Takaichi's plans include a $135 billion public spending boost, equivalent to 3% of Japan's GDP, and the elimination of consumption tax on food, costing an additional $30 billion. Despite Japan's poor demographics and sluggish economic growth, which hinder its ability to manage debt, the government's strong parliamentary majority may override resistance from financial institutions.
Signs of trouble are already emerging: Japanese bond yields have doubled over the past year, with the 20-year yield reaching 3.15%, a level not seen since the late 1990s. Concurrently, the yen has fallen to a three-decade low, exacerbating inflation, which is already at a multi-decade high of around 3%.
Potential Spillover to the U.S. and Beyond
A Japanese currency crisis could reverse the yen carry trade, a key source of global financing, prompting Japanese investors to repatriate capital and destabilizing international markets. In the U.S., troubling indicators include a rise in the 10-year Treasury note yield to over 4.2%, despite reduced long-term issuance and interest rate cuts, alongside a 10% depreciation of the dollar and a 70% surge in gold prices over the past year.
Investors are likely to intensify scrutiny of countries with unsustainable public finances, with the U.S. at the forefront. This heightened awareness could lead to increased market volatility and economic uncertainty worldwide.
Desmond Lachman, former deputy director at the IMF and chief emerging-market strategist at Salomon Smith Barney, provides critical insights into these unfolding economic dynamics.
